Independence of central banks, inflation and fractionalization of society in post-socialist countries

Abstract

Post-crisis literature concentrates on the problem of low inflation economic environment for which traditional factors of macroeconomic instability are rather not important. However, is this approach adequate in the case of post-socialist countries for whom the validity of euro-integration divide of institutional path of development takes place? Can the fact of factionalized societies explain the deviations from traditional form of opposite correlation between central banks independence and inflation? Using a sample of 22 post-socialist countries, it is found that there is inverse (traditional) relation between central bank independence and inflation. The degree of such correlation does not decrease much in the case of a lower inflation period. Development of democracy supports the choice toward higher central banks independence. The level of social conflicts affects inflationary instability and in the same time reduces space for consensus about increasing central banks independence. At the same time, the case of higher central bank independence and higher level of inflation compared to average group level (case of Ukraine) corresponds to the strongest fractionalization of society. This helps to conclude that institute of central bank independence is based on informal political rules of behaviour, incentives to maintain which are rooted in the nature of social disharmony.